Welcome!

In this edition we look at:

• President-elect Obama's free trade credentials
• Opening up Australia's foreign investment regime
• APEC's capacity to respond to the global economic turmoil

Plus we report on policy responses to rising food prices through capacity building.

We encourage your feedback.

ANALYSIS: by Alan Oxley, Chairman of the APEC Centre

It was disappointing that APEC Leaders at the Peru Summit merely committed to not introduce new protectionist measures, instead of committing to accelerating trade liberalisation, as part of their response to managing the global financial crisis. It remains to be seen if yet another commitment to conclude the Doha Round is more successful than similar previous commitments at the last five Summits.

The greatest cause for concern about protectionism is from someone who was not at the APEC Summit, President-elect Obama.

Informed speculation in the media that he has offered the position of US Special Trade Representative to a Californian Congressman, whose voting record on US FTAs is very close to the position of the AFL CIO, the peak body for organised labor in the US. For example he opposes NAFTA and the FTA with Colombia, but supported the FTAs with Chile and Peru which included labor and environmental provisions.

Public Citizen, Ralph Nader’s organization, one of the leading protectionist advocates in the US has declared Barak Obama is the first “fair trade” President. “Fair trade” is doublespeak in the US for protectionist trade policy. Its other proponents are the AFL-CIO, environmental groups and anti-free market groups like Oxfam.

During the election campaign Obama promised trade agreements would require enforcement of environmental and labour standards (especially from countries which made products more cheaply than US manufacturers). He said he would unilaterally renegotiate the North American Free Trade Agreement and insert enforcement provisions into the WTO to achieve this. Such a change to the rules of the WTO would wreck it.

Obama economic advisors assured questioners during the campaign that he was pro-trade and economically mainstream. Political historians noted that Bill Clinton toyed with similar ideas when running for office but, once in power, was pro-free trade.

There is an important difference today. There is a strong anti-free trade sentiment in the United States. Late in the Presidential election campaign, a Wall Street Journal/CNBC poll showed Americans thought trade agreements harmed more than helped the US. Obama tapped that spirit, winning over traditional Republican States with promises to protect the jobs of Americans in fading manufacturing enterprises, usually unionized.

The new (111th) Congress will urge Obama in that direction rather than restrain him as its predecessors restrained the first Clinton Administration. Public Citizen claims there are now some 60 more avowedly “fair trade” senators and congressional representatives in the newly elected Houses than two elections back.

In the 110th Congress, some thirty Democrats sponsored a Bill to set the terms for the negotiating authority Administrations need to secure to negotiate trade agreements. Those terms would require an Administration to gut commitments to liberalise investment, services and agriculture in existing trade agreements. The principles were reflected in the Democratic Party platform.

It is not uncommon for Bills to be tabled in Congress to record political positions with no expectation they will be adopted. But Obama reflected those core principles in key speeches during the campaign and voted against the Free Trade Agreement negotiated with Colombia which provided concrete trade benefits for US manufacturers.

The Obama Administration will be tested early on trade policy. The Free Trade Agreement with South Korea is awaiting Congressional assent. It was a Korean initiative which was politically costly. It is strongly opposed by Korean farmers.

If the strategy of the Obama Administration is to emulate the first Clinton Administration, it will have trouble. The first Bush Administration secured trade negotiating authority from Congress by just one vote. That was two congresses back. This current Congress will be the most protectionist Congress in memory. Any trade negotiating authority it gives the Obama Administration will be heavily influenced by AFL CIO positions.

EVENTS: by Tim Wilson, Director, IP and Free Trade Unit at the Institute of Public Affairs

The Australian government was able to deliver unilateral trade liberalisation because there was an ongoing conversation on the benefits of free trade. Australia’s foreign investment framework hasn’t been unilaterally liberalised; and in large part that is because there has not been an equivalent conversation about the benefits of liberalising Australia’s foreign investment regulatory framework. The purpose of the Australian Open Investment Future symposium was to begin that conversation.

Support by papers delivered at the symposium, there is a clear basis for reform. IPA research fellow Julie Novak demonstrated in her paper that we currently live in a capital constrained world and that the Foreign Investment Review Board (FIRB) was acting as a barrier to investment. ITS Global Economic Consultant, Jeff Rae, estimated that the cost of FIRB was more than $5.5 billion to the Australian economy.

IPA research fellow, Tom Switzer, delivered a paper demonstrating that advocates for reform do not reflect public sentiment. In fact most Australians see foreign investment as a threat. And hence any liberalisation of FIRB needs to be tempered by the arguments put forward by Former Assistant Treasurer, Rod Kemp, and Former Industry Assistance Commissioner, Martin Feil. Both Kemp and Feil argued that FIRB acts as an agent for the political management of foreign investment and the management of resulting political tensions.

But any reform shouldn’t be at the fringes. Comprehensive reform is needed looking at FIRB. State and local government can both inhibit investment. In the lunch panel session private investor, Deepak Saxena, demonstrated the harm local government can do to halt investment. In his case local government inaction is directly halting the development of one of Australia’s largest agriculture projects. Similarly in the presentation on technology transfer local and State government content requirements undermine technology transfer resulting from foreign investment.

Australia has always been a net-capital importer. And that investment has driven wealth creation, industry growth, job creation and infrastructure development. Australia clearly cannot continue to grow economically without investment capital.

The conversation we hope to have started is to discuss what type of liberalisation program needs to be progressed. We know the current state of Australia’s foreign investment regulatory framework. Reformers need to decide what desirable post-reform scenarios are, and then, how to manage the transition. Because there will be hurdles along the way.

Julie Novak argued persuasively for FIRB to move away from a broad ‘national interest’ test to a very narrow ‘national security’ test. But how realistic is that?

And even if liberalisation takes place and a new ‘national security’ test is developed, there are new emerging complexities. The role of sovereign wealth funds and state owned enterprises as foreign investors is rising. Public perception is that they are political actors first, and economic actors second.

Yet as RMIT Professor, Sinclair Davidson, demonstrated the real threat from both SWFs and SOEs is when they operate within their own country. These investors will only gain special privileges in Australia if they are afforded them by Australian law. Otherwise they are bound by Australian law like any other investor. The issue remains the exercise of sovereign power in Australia, not in any other country. They pose no threat extraterritorially.

And it is clear that Australia has policy instruments available to it to liberalise its foreign investment regulatory regime. In addition to modes of liberalisation of FIRB, Kristen Bondietti identified that there are currently inconsistencies in the investment regulations afforded to countries through our free trade agreements.

The AUSFTA affords increased investment screening thresholds for US investors, but comparable thresholds do not exist for investors from other countries. There is a good justification for consistency. But pursuing investment liberalisation through bilateral agreements should be recognised as a third best option. A second best is multilateral liberalisation, but the best is unilateral liberalisation.

And lifting thresholds is not the only area of possible reform. As Peter Gallagher argued, FIRB currently spends an inordinate amount of time approving real estate acquisitions as a result of outdated regulations.

But managing change also means managing perceptions. In the final panel session State Economics Editor, Marc Moncrief, also made the point that the public won’t be taken along if the media isn’t interested in communicating the arguments for reform. Currently there is no media enthusiasm for the lost opportunity from lost foreign investment. To progress liberalisation, arguments for reform in a highly technical policy area need to be made consumable through the opinion pages and news articles of Australian newspapers.

What is clear is that we need to proceed with any reforms with caution. And the only way to get support for reform is though the conversation we have started about the costs, the benefits and how to mitigate the challenges of foreign investment.

The full set of papers from the Australia's Open Investment Future symposium can be viewed here.

PERSPECTIVE: by Ken Waller, Director of the Melbourne APEC Finance Centre

The IMF’s World Economic Outlook update of 6 November warned that global growth prospects had deteriorated over the month to November as financial sector deleveraging had continued and producer and consumer confidence had fallen. The Fund projected a much reduced expansion in world output to 2.2 percent, down by three quarters of a percentage point of GDP relative to projections made as recently as October. Output in advanced economies is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period. Growth in developing economies will slow appreciably but could reach five percent in 2009. Most recent projections are for world output to grow by 3.9 percent in 2008, and three percent in 2009, compared with growth of five percent in 2007.

Since the November outlook was published, economies have implemented significant fiscal stimulatory measures in an attempt to reduce the impact of the financial crisis on real activity and to limit falls in employment levels. However, as noted recently by US President-elect Barack Obama things are likely to get worse, at least in the US, before they get better. But concerns of falling activity are now global and individual economies across the world are reducing constraints on budget spending. Fiscal relaxation has been preceded by monetary accommodation – and monetary accommodation continues – in the form of major cuts to interest rates in many economies and in measures to increase liquidity to promote lending by banks and other intermediaries. At this juncture, cheaper money is not enticing firms and individuals to invest and to consume and this does raise the spectre of economies falling into a liquidity trap, when nominal interest rates come close to or equal zero. While there is some way to go in some economies of the liquidity trap, the prospect of excess liquidity and no increase in demand for money for investment and consumption does lead to concerns of deflation. This set of phenomena is a great challenge to economic policy makers, to business and to the community broadly.

Sages note that there is no one silver bullet to the present monetary crisis now confronting the world. And it is for this reason that governments and policy advisors are trying a myriad of actions to stabilize financial systems and to promote investment, consumption and output. Actions are sometimes novel and driven less by ideology. They may well involve a break from concepts that have underpinned policies during the recent and long period of sustained growth. That said, a move into temporary budget deficit over the course of a cycle is consistent with the concept of budget balance over the cycle. Many governments are currently demonstrating a pragmatic approach to policy making in the present crisis and this is vital to avert a major global recession.

Against this backcloth, APEC Leaders at their meeting in Lima in late November committed to act quickly and decisively to address the global economic slowdown, supported fiscal and monetary stimulus provided by APEC member economies and agreed to take all necessary actions to offer hope to those most in need. Major fiscal and monetary actions have been or are being taken in many APEC economies. Before the APEC Leaders’ meeting, some major participants in APEC, members of the G20, noted that they had taken strong and significant actions to stimulate economies, to provide liquidity, to strengthen the capital of financial institutions, to protect savings and deposits, to address regulatory deficiencies and to unfreeze credit markets. They acknowledged that more needed to be done to stabilize financial markets and to support growth.

Importantly, G20 agreed that a broader policy response is needed, based on close macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging markets. They committed to an impressive range of immediate and long-term steps to implement the policy agenda.

Global and regional cooperation in dealing with the current crisis is vital and the process of greater cooperation that marks the most significant improvement in global affairs in the post second world war period. Some argue that economic and financial market integration is the major cause of global financial instability. Quite clearly, the current crisis has highlighted many short-comings in regulatory supervision in relation to leveraging, transparency, accountability and governance, issues that are now the subject of intense examination by governments, standard setting bodies and regional and international agencies.

But a fundamental point about globalization is that some major economies in G20 that are leading their communities out of poverty and onto long term growth trajectories, India, China, Indonesia, Brazil and Mexico, to name a few, choose membership of that group and participation in the Group and in the global integration process. In 2009 in a period of slowing world activity, growth projections for these economies, while lower than recent trends, will exceed growth of the advanced economies.

CAPACITY BUILDING: by the APEC Centre

The mercurial rise in non-fuel commodity prices over the last ten years has created significant policy pressures, particularly for developing economies. The steady increase in food prices across the globe has also seen the use of regulatory intervention rather than open market policies. Measures to control pricing and export distribution are among but a few governments have taken in response to escalating prices, which has created an opportunity to present afresh the benefits and utility of using open market reform tools.

At the same time, all countries are being challenged in the WTO to liberalise trade in agriculture to bring the Doha Round to conclusion.

The Australian APEC Study Centre designed and delivered a capacity building training program for APEC regulators recently to understand the utility of using open market economic principles in order to develop policy responses to the challenges of rising price and trade liberalisation.

The program sponsored by AusAID assessed trends in global and regional commodity markets. Production, pricing and the impact of other policy measures such as controlling fuel prices and carbon emissions abatement provided 20 officials from economies, including Indonesia, Thailand and the Philippines, an overview of recent commodity supply and demand developments.

In order to achieve a higher level of food security economic matters such as stock piling, supply and distribution were considered, as were policies to improve production that included an analysis of the effects of trade barriers and subsidies, and measures to improve wholesale markets.

The program also presented two case studies on grains and sugar where policy objectives and the evaluation of trends in the ASEAN region were discussed.

At the conclusion of the program officials demonstrated a capacity to better respond to the challenges confronting agricultural policy in an uncertain global commodities market through measures to improve the contribution of agricultural production to economic growth in their respective economies.

While agricultural prices have tapered off in the last quarter of 2008, some fundamentals remain in place with the IMF forecasting modest reductions in the commodity non-fuel price index in 2009. For more information click here to read a paper on the subject by the Academic Coordinator of this program, Peter Gallagher.